PIMCO posted a brief Friday entitled, "Encroaching Risks to Capital Preservation." Written by Jerome Schneider, head of short-term portfolio management, the piece discusses rising rates and inflation and the benefits of moving beyond money markets. It says, "Positive economic data continue apace in the U.S., from firming employment to renewed consumer spending. The latest news on inflation confirms the trend: The Consumer Price Index (CPI) showed inflation running at 2.5% year-over-year." We review this below, along with excerpts from Fidelity's Annual Report. (Note: PIMCO's Jerome Schneider is scheduled to give the keynote talk at next month's Bond Fund Symposium, which is scheduled to take place March 23-24 at the Boston Hyatt Regency.)
PIMCO's piece explains, "The data do not even tell the whole story: Also in play are the Trump administration's growth-oriented fiscal stimulus and tax policies. Despite the long road from policy articulation to policy implementation, the Federal Reserve is eager not to be perceived to be "behind the curve," as Fed Chair Janet Yellen recently reiterated the Fed's commitment to continue on the path toward interest rate normalization. As the signs of growth quietly mount, investors should prepare for the shift toward a rising rate environment by focusing on income and capital preservation."
It continues, "The costs of capital preservation have been rising for some time due to low interest rates. Investors using traditional cash liquidity management instruments such as money market funds may want to consider the ramifications of remaining in strategies that offer liquidity but little in income or return, especially in the face of rising rates."
Schneider writes, "We urge investors focused on capital preservation to consider whether it makes sense for them to limit their exposure to the combination of low returns and creeping inflation during the Fed's rate normalization process. The combination could potentially erode the purchasing power of a pure capital preservation portfolio, including traditional money market strategies, throughout 2017 and beyond. Instead, actively managing cash and short-term allocations may help maximize returns and thus aim to mitigate the impact of inflation on the purchasing power of invested capital."
He adds, "An improving growth picture gives fodder to the Fed to increase rates this year -- possibly several times. It should also be a signal for capital preservation and liquidity investors to read between the data lines: The improving economy may silently undermine their strategic objectives. Without prudent action and vigilant monitoring, investors with $1 today may find they have 98 cents of purchasing power, or even less, next year."
In other news, Fidelity Investments released its "2016 Shareholder Report" on Friday. It comments on money market and bond funds, "The fixed income division continued to post strong results. For the one-, three-, and five-year periods, our investment-grade bond funds beat 67%, 71%, and 61% of their peers, respectively, while our industry-leading money market funds beat 80%, 75%, and 74% of peers over the same periods."
It also says, "Mirroring the industry-wide movement from active strategies toward passive ones, Fidelity's actively managed equity mutual funds saw $57.7 billion in net outflows during the year. These outflows were offset by $19.1 billion of flows into our managed account products, $22.6 billion of flows into money market funds, and $16.1 billion of flows into Fidelity index funds. In June, we announced a series of enhancements to our index mutual fund lineup, including expanded customer eligibility for institutional share classes and three new funds. We also reduced total expenses on 27 of our equity and bond index mutual funds and ETFs."
Fidelity tells us, "Asset Management's Bond team continued to do an outstanding job of delivering strong, consistent risk-adjusted long-term performance. For the one-, three-, and five-year periods ending December 31, FMRCo investment grade bond funds beat 67%, 71%, and 61% of peers, respectively. Fidelity's bond products posted inflows of $14.8 billion in 2016. In investment-grade bond -- by far the largest fixed income category in the marketplace -- Fidelity captured 8% of industry flows, outpacing its 6% market share."
They continue, "AM also saw continued success in its money market fund franchise, following a series of changes to industry rules by the Securities and Exchange Commission. Fidelity implemented a product plan designed to offer investors choice and to position the business for future growth, while ensuring compliance with the new rules. During 2016, Fidelity increased its industry-leading market share to 18%, with $485.8 billion in AUM."
The report adds, "The FIAM team also successfully navigated the federally mandated changes to institutional money market funds, which, after a two-year preparation process, were implemented in October. With average institutional money market assets of $142 billion, FIAM averaged market share of 8% in 2016."
Finally, it says, "Certificates of deposit (CDs) continued to be popular in the current low interest rate environment. During the year, FCM added 30 new banks, bringing the total number of banking relationships to more than 100, and originated $19.2 billion in CDs for Fidelity customers, a new high."
